Bonus Plans: Don’t Make These Fatal Flaws

Where's the Money? (3)

Performance Bonus Programs represent a straightforward practice used to motivate performance, improve employee engagement and ameliorate a team’s compensation concerns while managing fixed salary expenses. Many times the decision to implement a bonus program is driven by the business leader, and the process of developing the plan involves financial modeling and a myopic focus aimed at solving a single problem, such as the need to improve sales or grow the customer base.

Seems simple enough! However, there are underlying principles that need to be thoroughly addressed if a bonus program is going to achieve the goals it is designed to achieve. If these elements are ignored in the initial decision-making you may find that your bonus program fails to achieve the desired results, creates unintended and unpleasant consequences—and you end up pouring your money down a rat hole.

Lesson #1: A bonus program will drive the behavior that is incented, therefore, be clear on how you structure the goals.

My first experience with this “fatal flaw” was with a sales organization in which the EVP of Sales launched a bonus program intended to increase sales. The fundamentals of the program were very simple: after a person sold 100% of their quota they would receive an incremental bonus payment in relation to the incremental improvement in sales. At first the program seemed to be working great —sales were growing, and in some locations, the numbers were stratospheric. However, in about six months the EVP started receiving data from the accounting department that sales cancellations and uncollectable accounts were also growing at an alarming rate—and in many cases correlated to the locations showing record sales.

The EVP turned to HR to help get the program back on track and I was assigned this task. While I won’t go into the details of my investigation, the bottom line was that the goals of the bonus program had not been thoroughly thought through and focused on one aspect of sales growth—writing new business. When setting the goals for a bonus program be sure that they not only drive the stated behavior, but do not encourage undesirable behaviors, as well.

Tips:

  • Ask yourself, “If the team only focus on doing “x”, what could go wrong?”
  • Align the bonus goals with other performance goals, as in “Increase sales over quota without increasing the cancellation rate.”
  • Keep the goals, simple, clear and measurable—remember S.M.A.R.T. goals.
  • Bonus goals should be strategic business drivers and be sustainable. Although they may need to be tweaked from time to time, if the direction is constantly changing, the bonus program will lose its credibility—fast.
  • Don’t have a laundry list. Keep a laser focus on what you want to accomplish and identify the 2-3 things that will make it happen.

Lesson #2: The goals and objective for which people are incented must be tracked and visible to people in real time or at least in frequent intervals.

My second bonus program nightmare comes from another organization that launched a bonus program for a team that was sort of a hybrid sales-relationship management operation. To the credit of the top executive, he hired a well-known consulting firm to design the program. They came up with a solid design along with two very important metrics that clearly drove revenue and a smaller percentage of the payout that was tied to personal KPIs.

I started working with this team one month before the first bonus payout was to be made. During that first meeting I learned that while the goals and metrics were clear the calculations were not shared with the employees until well after they’d received the bonus check. When the first payout was made, the employees were confused and disgruntled. Many people thought they had performed better than indicated by the amount received and there was a feeling that the bonus program was unfair and arbitrary, even a bit of a bait and switch.

The analytics team worked very hard for several more quarters to create a better and more visible tracking system for the team, but could never figure out a way to do that because there were too many variables involved in the calculation. Bonuses continued to be paid and people continued to be unhappy with them. At the end of the year I had a conversation with an employee who was leaving her role to take a position in another business unit, one that did not have a performance bonus program. She told me she was leaving because the other position paid more. Her statement puzzled me since I had the salary information for both positions. She currently made $80,000 and had received a bonus of $28,000 making her annual compensation $108,000. The new position paid $88,000 with a straight company bonus of 15% or total annual compensation of $101,200. I pointed out that she actually made more in her current position. She replied that the bonus didn’t count— to her it was “magic money”.

Tips:

  • Bonus programs drive performance when people can adjust their efforts to improve their results against their goals.
  • If people can’t see how they are performing against these goals they don’t have the ability to correct course and will not feel they control their earning potential.
  • If performance metrics are not visible to people, the program may lose credibility and people may start to view the bonuses as “magic money,” or worse.
  • If the organization does not have the ability to track metrics and make them visible and accessible to participants in the bonus plan—come up with a different compensation strategy.

A bonus plan is both a strategic business decision and a financial decision, but neither the strategic nor the financial goals will be met if you ignore the fundamentals of clear goals and clear communication. HR’s role is to make sure that the impact of a bonus plan is positive, motivating and in support of those strategic goals.

The Purpose of HR

Conceptual image of teamwork - 6. 3D image.

Most people I’ve talked to give their Human Resources departments mixed reviews. Some organizations have vibrant and influential HR functions, while in others HR is viewed as an administrative or compliance function that is more of a nuisance than something that provides value.

Where HR is primarily administrative, you’ll find frustrated HR people who often complain that no one listens to them or appreciates all they do for the organization. The lack of appreciation is hardly surprising, because their focus is on fulfilling their administrative duties (enrolling people in benefits plans, following up on paperwork, hanging the required posters, etc.) that only get attention when someone messes up. Any organizational power they have (and it ain’t much) comes from generating the fear of legal disaster if people fail to follow the rules. They are experts at providing you with all the reasons why you can’t do something, so many people deal with them as we used to deal with our parents: ignore them as much as possible and grudgingly comply when necessary.

While there’s no question that HR has to provide operational excellence, dot the i’s and cross the t’s, that’s simply not enough to earn kudos. Those are basic administrative tasks that customers of HR services expect from any HR department as part of the package. How HR provides real value to an organization has little to do with the paperwork.

Let’s get real. HR has no tangible power in any organization. HR generates no revenue (in most cases) and compared to other more powerful or “bottom line” functions, doesn’t have much of a budget. Any organization can outsource or automate any HR function if they don’t find value in the HR Department they have. Less drastic but more common is the tendency of managers and employees to work around HR so they don’t have to deal with silly bureaucracy and a thousand reasons why they can’t do what they want to do.

So, what can an HR leader do to change this mindset and provide value? First, you have to change your focus from administration, compliance and paperwork and focus on the people you’re serving. The only legitimate purpose for any HR Department is to help the people in the organization make effective choices to enable the organization and its people to achieve their goals. HR’s role is to facilitate and the core meaning of the word “facilitate” is to make things easy. HR’s orientation is one of responsiveness to both immediate and long-term business needs, providing both operational excellence and strategic insight. HR never works for HR purposes; HR is there only to serve its customers.

Here are some examples of how HR can accomplish this purpose, role and mission:

  • Recruiting: Design recruiting processes that are both thorough and fast for both candidates and hiring managers. Ensure that information is organized and presented in such a way that both candidates and managers can make informed and valid hiring decisions. Constantly stay in touch with candidates and managers to avoid any unpleasant misunderstandings that can derail the hiring process. Do the usual metrics, but realize that success in hiring only comes when both the candidate and the hiring manager are happy with the choice they made—both on day one and on the one-year anniversary.
  • Benefits: Design your benefits plans so that demographics, job market and financial considerations are in balance. Watch your utilization numbers and factor them into any decision-making: they tell you what people value. Involve your employees in evaluating benefits plan designs before you launch them. Most importantly, organize the information on plan choices so that it is easy for the average employee to make the best selection possible given their life circumstances.
  • Employee Relations Issues: Stay neutral. Your best chance of protecting the company is to avoid taking a pro-management protect-the-company stance, because all that does is force the employee into a get-an-attorney stance. You can best protect the company by being honest and fair, by pointing out choices and consequences, and by listening carefully to all sides of a problem.
  • Compensation: Accept the fact that everyone thinks they’re an expert on compensation and listen to their beliefs, no matter how un-HR they may seem. The goal of any compensation program is to avoid pay dissatisfaction and provide motivation where feasible. Have solid market data on hand to facilitate management decision making. Stay current on the competition and on market trends.
  • Strategy: While it’s important to align all HR programs with the company’s strategy, HR has to be a player in the strategic decision-making process. The most important contribution the HR leader can make is to remain in the facilitator role, providing solid factual information, making helpful observations on group dynamics, rephrasing ideas, drawing out ideas that may be incomplete and playing the wet blanket when it looks like everyone just wants to do what the CEO wants.
  • Service: Fundamentally, the value of HR comes down to what you do when a customer drops in or gives you a call. Drop what you’re doing and give your customer your full attention, no matter what their status. Everyone in your organization is a customer who needs your help making choices. Help them.

These examples may appear simple, but there is a lot of work involved to put yourself in the position of truly helping people. HR people need to model continuous learning—not only in their HR professional speciality, but in other HR specialty areas and business itself. HR people need to have the most flexible and open minds in the organization, because you never know what human beings are going to come up with next. HR cannot be “The Department of No” and achieve a customer-positive mission.

In the end, any power HR has in an organization is based on the integrity and credibility of the people in the HR Department. You project integrity when you listen and tell the truth. You gain credibility when you deliver on your commitments to your customers.

And those things are simple.

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